Tata Steel drops 3% on Moody's negative outlook; Leverage to remain weak till 2023

Moody's has confirmed a Ba2 corporate family rating (CFR) of Tata Steel.

Jul 14, 2020 01:07 IST India Infoline News Service

An employee sits in a railway train cabin at the steel works operated by Tata Steel in Port Talbot. Bloomberg
The outlook ahead for Tata Steel does not look bright, as the global rating agency, Moody's Investors Services has revised its trajectory on the company to negative from under review. Moody's have confirmed a Ba2 corporate family rating (CFR) of Tata Steel. Moody's believe the company's leverage and coverage will remain weak till at least 2023, and further contraction in steel market will just add further woes to its performance.

Post Moody's rating announcement, the Tata Steel stock has plunged by nearly 3% on Sensex with an intraday low of Rs332.85 per piece in early deals of Tuesday. At around 01.20 pm, the stock was performing at Rs334 per piece down by 2.34% on the same index.

Kaustubh Chaubal, a Moody's Vice President and Senior Credit Officer said, "The confirmation of Tata Steel's Ba2 CFR recognizes that while the company's credit profile will deteriorate due to the challenges brought on by the pandemic, its key financial metrics will likely recover to levels appropriate for its rating by the fiscal year ending March 2023 (fiscal 2023)".

Chaubal adds, "However, Tata Steel's leverage and coverage will remain weak until fiscal 2023, and the negative outlook indicates the risk of a downgrade if the steel industry and the company's financial metrics do not recover in line with our current expectations".

That said, Moody's expects the company's leverage, as measured by adjusted debt/adjusted EBITDA, will increase to 7.5x by the end of fiscal 2021 from 6.6x a year earlier, and stay in breach of the current 4.5x downgrade trigger for its rating.

Further, Moody's predict that India's steel consumption, which is Tata's key operating market, will contract by at least 15% through fiscal 2021 because of weak automotive and manufacturing demand, even as infrastructure investments rise. India's economic growth will also remain materially lower than in the past with real GDP shrinking 3.1% in 2020.

"A contracting steel market in India will hurt Tata, but this is partially mitigated by the company's strong market position and brand strength in the country," Moody's said in its note.

The rating agency expects Tata Steel to deploy any steel surpluses towards exports. The company's export shipments surged in the first quarter of fiscal 2021 when domestic demand was soft. Its key export destinations include the Philippines, Malaysia, Southern Europe, the Middle East and China.

However, Moody's also said, Tata Steel's credit metrics will steadily improve in fiscal 2022 and 2023, considering the relatively strong business profile of its Indian operations, as well as its brand strength, vertical integration and technological capabilities, which will help the company sustain above-average profitability.

Even, the company's UK subsidiary Tata Steel UK Holdings' rating B3 CFR has been withdrawn by Moody's with an outlook of negative from ratings under review.

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